An Ignoble Prize

Eugene Fama, one of the winners of this year’s Nobel in economics, is the fellow who proposed that all markets are efficient all of the time—more precisely that market pricing accurately captures all available information and thus creates “correct” prices. Fama also insisted that there is no such thing as a price bubble.

Somehow, the man missed one of history’s great bubbles and the collapse that followed—an epic case of markets getting prices wrong. He also missed the fact that markets have incorrectly priced carbon, leading to global climate disaster, which Lord Nicholas Stern correctly termed “history’s greatest case of market failure.”

For this, they give the man a Nobel. What timing!

The mind boggles in search of an apt comparison. It’s like giving a posthumous Nobel in physics to Ptolemy rather than Copernicus for demonstrating that the sun revolves around the earth. Or maybe in biology not to Gregor Mendel or Charles Darwin but to Trofim Lysenko, Stalin’s court geneticist, for arguing that acquired traits can be inherited.

And just to add to the drollery, they twinned Fama’s Nobel with one to Robert Shiller, the economist who correctly warned about the housing bubble in 2005 and added new insights about herd behavior in financial markets. I hope Shiller is duly embarrassed to have to share the stage with Fama.

What gives with this prize?

Three things you need to know are that this is a Johnny-come-lately Nobel. It was not one of the original prizes underwritten by Alfred Nobel in 1895, but was added by the Bank of Sweden in 1969. Its actual name is "The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel." But the press quickly accepted the cheeky co-branding and treated the “Nobel” in economics as a legitimate Nobel.

Secondly, for decades the committee that selects the winner was dominated by one Assar Lindbeck, a former social democrat turned neo-liberal, who made sure not only that leading Chicago economists were lauded but that some truly goofy and second-rate conservatives such as James Buchanan got the prize. Lindbeck, who had a healthy ego, liked to refer to himself as the invisible hand guiding the process, thus inadvertently demonstrating that the supposed free marketplace of ideas is one more market that doesn’t work like the model. Lindbeck is gone but the habit lingers.

The committee is also notorious for splitting the difference and jointing awarding the prize to economists whose contentions are irreconcilably at odds. In 1974, they gave it jointly to Friedrich Hayek, the ur-libertarian, and to the great progressive economist/sociologist Gunnar Myrdal.

In no other discipline do leading practitioners fail to agree on core suppositions. All of which goes to show not just that this prize is debased but that economics remains more of a religion than a science.